Gavin Kelly: Think the cuts are biting? The pain has hardly begun

Analysis: The most politically dangerous cut will kick in in 2013 - the abolition of child benefit for higher-rate taxpayers
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The Independent Online

Buoyed by a run of bank holidays and balmy weather, optimistic families may think that, having absorbed the changes announced in April's Budget, the worst is behind them. Sadly, that is a false hope. Plenty more pain is in the pipeline.

To see why, just look at what is coming in terms of cuts, wages, and interest rates. The cuts that kicked in on "Worse-off Wednesday" accounted for a mere 10 per cent of the total savings arising before 2015 from changes to tax credits and child benefit. The pain is "back-loaded"; over 40 per cent of these cuts kick in in 2013.

For many, the biggest threat to living standards does not arise from what George Osborne has done but from the impact of higher prices and stagnant wages. This is not a new problem – disposable income has been falling in every region outside London since 2003 – but it is a worsening one. The current wage squeeze is expected to continue until at least 2013, when average real wages are expected to fall to under £25,000, over £1,800 lower than in 2009.

Add to this the anticipated rises in interest rates and mortgage payments – the one area of respite over the last few years – and things get bleaker. The Bank of England expects interest rates to climb towards 3 per cent in 2013, piling pressure on the 59 per cent of low-to-middle-income households that already struggle to pay their bills.

And it is in 2013, just at the moment of peak pain, when the most politically dangerous cut will kick in: the abolition of child benefit for higher-rate taxpayers. Few tears will be shed on behalf of the genuinely affluent. But, because the change is blunt, it will cost many middle-income single-earner families thousands of pounds, including some struggling on below-average household incomes.

The political reaction to this will be magnified if 2013 is also when the 50p tax rate on the richest 1 per cent of earners is abolished. Whatever your views on the 50p rate, it is an understatement to say that twinning this announcement with cuts to child benefit will prove politically hazardous for the Coalition.

If Mr Osborne is the political operator he is often billed as, don't be surprised if he finds spare cash to allow him to revise plans for child benefit, thereby ensuring that a crucial group of middle-income voters avoids a further major hit to household incomes this side of the next election.

Gavin Kelly is chief executive of the Resolution Foundation.